Unit II: Audit Procedures

1
and Techniques
2 🠶 What are the Preconditions for an audit?
1) The Financial Reporting Framework (FRF) applied in the preparation of the
financial statements (FS) is acceptable.
2) Acknowledgement received from the management that it understands its
responsibilities regarding:
i. Preparation of FS according to applicable FRF, including fair presentation.
ii. For such internal controls as is required so that the FS are free from
misstatements due to frauds and errors.
3) Provide the auditor with:
i. Access to information. (Records, documents and other matters.)
ii. Additional Information required by the auditor.
iii. Unrestricted access to persons within the entity.
4) There has been no ‘Limitation to Scope prior to Accepting the Audit
Engagement’.
3

🠶 What is an Engagement letter?

It is a letter written by an auditor and given to the client setting the scope
of audit as well as preconditions of the audit which is required to be
accepted by the client.
🠶 What is the Limitation to Scope prior to Accepting the Audit
Engagement?
If the management/TCWG imposes a limitation on the scope of the
auditor’s work in terms of a proposed terms of engagement such that the
auditor believes that the limitation will result in the auditor disclaiming an
opinion on the financial statements, the auditor shall not accept such a
limited engagement as an audit engagement, unless required by law or
regulation to do so.
4

🠶 What is the Management’s Responsibility in respect of an Audit?

1. Management is responsible for the maintenance of Books of Accounts.
2. They are responsible for the preparation of the Financial Statements in
accordance with the applicable FRF and their fair presentation.
3. Implementation of the appropriate Internal Controls which are deemed
necessary to prepare the Financial Statements free from material
misstatement whether due to fraud or error.
5
🠶 What does an Engagement letter include?
The auditor and the management shall agree to the terms of audit
engagement and record the same in an ‘audit engagement letter’ or other
suitable form of written agreement.
Any such letter should mention the following:
🠶 Objective of Audit of FS
🠶 Management’s responsibility w.r.t:
a) Selection of appropriate accounting policies.
b) Consistent application of those accounting policies.
c) Preparation of FS on going concern basis.
d) Maintenance of adequate accounting records.
e) Written Representations by Management.
f) Arrangements concerning involvement of internal auditors and other
staff of the client.
6 Audit Programme
🠶 What is it?
Audit Programme can be defined as “a logically planned examination
specifying the audit procedures to be applied in given circumstances for
accomplishing the audit objectives, giving an estimate of time required to
finish a particular work and laying down responsibilities of members of
audit team.”
 🠶 What are the Advantages of an Audit Programme?
7
1. Provides clear-cut instructions
2. Provides a total perspective
3. Provides a tool for efficient distribution of work
4. Assists in fixing responsibility for work done
5. Helps in assessing progress of work
6. Serves as evidence against charge of negligence
7. Serves as a basis for subsequent revision
8
🠶 What are the Disadvantages of an Audit programme and its safeguards?

Disadvantages Safeguards
Audit work becomes mechanical- Encourage staff to draw attention of the auditor
The audit procedures are listed in detail. As a to any defects in the programme.
result work becomes mechanical.
Rigidity- Staff should discuss modifications necessary in
The listed procedures are carried out by audit the audit programme in the light of changes in
assistants despite changes in business internal control system, accounting procedures,
operations such as changes in internal control business policy of the client and unexpected
system or staff. results of audit procedures.
Shields inefficient staff- Inefficient audit Caution the staff not to restrict themselves to
assistants may take shelter behind the investigative routines set forth in the audit
programme. programme and should be encouraged to
explore fully unusual transaction or questionable
practices that come to their knowledge while
carrying out the audit.
Reduces the initiative of efficient staff- It may put
fetters on the initiative of efficient and intelligent
staff members.
9 SA 230(Revised)- Documentation
🠶 Documentation=Audit Working Papers
🠶 Audit working papers “constitute all documents prepared or obtained or
retained by the auditor during the audit and the audit conclusions.
🠶 Audit working papers are the connecting link between the client’s
accounting records and the auditor’s report.
🠶 Audit Working papers are the written records kept by the auditor of:
🠶 1) the evidence accumulated during audit,
🠶 (2) the methods and procedures followed and
🠶 (3) the conclusions reached . They include all information that the
auditor considers necessary to adequately conduct his examination and
provide support for his report.
10 Objectives/Utility of Working papers
🠶 Principal Objectives: Serve as auditor’s principal record of work
performed and conclusions reached regarding significant matters.

🠶 Provide evidence of the auditor’s basis for a conclusion about the

achievement of overall objectives of the auditor .

🠶 Provide evidence that the audit was planned and performed in

accordance with standards on auditing and applicable legal and
regulatory requirements.
11 Other Objectives
🠶 Assisting the audit team to plan and perform the audit.
🠶 Assisting the members of the audit team responsible for supervision to
direct and supervise the audit work, and to discharge their review
responsibilities in accordance with Quality Control for Audits
🠶 Enabling the audit team to be accountable for work.
🠶 Retaining a record of matters of continuing significance for future audits.
🠶 Enabling an experienced auditor to conduct quality control reviews and
inspections in accordance with standards of auditing generally accepted
in India.
🠶 Enabling the experienced auditor to conduct external inspection in
accordance with applicable legal, regulatory and other requirements.
12 Form, Content and Extent of documentation
(a) The auditor shall prepare audit documentation that is sufficient to enable an experienced
auditor, having no previous connection with the audit, to understand –

🠶 The nature, timing and extent of audit procedures performed to comply with the SAs and
applicable legal and regulatory requirements.

🠶 The result of the audit procedures performed, and the audit evidence obtained.

🠶 Significant matters arising during the audit, the conclusions reached thereon and
significant professional judgments made in reaching those conclusions.
13 Form, Content and Extent of documentation
(b) In documenting the nature, timing and extent of audit procedures performed, the auditor
shall record:
🠶 The identifying characteristics of the specific items or matters tested.
🠶 Who performed the audit work and the date on which such work was completed.
🠶 Who reviewed the audit work performed and the date and extent of such review.
14 Content of Working Papers
Working papers should state:

❑ Client’s Name
❑ Type of Engagement
❑ Nature of Client’s Business
❑ Degree of reliance on Internal Controls
❑ Sources of Information
❑ Conclusion Reached
❑ Supervision and Review of Work performed by Assistants
15 Filing of Working Papers
Audit Files

Permanent Current
Files Files

In case of recurring audits, some working paper files may be classified as “ Permanent
Audit Files” which are updated with information of continuing importance to succeeding
audits, as distinct from “Current Audit Files” which contain information relating primarily
to the audit of a single period.
16 Content of Permanent Files
❑ Memorandum and Articles of association of the Company.
❑ By-laws or Regulations in case of Society or Co-operative Society
❑ Record of Study and Evaluation of Internal Control.
❑ Copies of audited Financial Statements of previous years.
❑ Record of communication with retiring auditor.
❑ Notes regarding significant accounting policies
❑ Important Audit Observations of previous years.
17 Content of Current Files
❑ Correspondence relating to acceptance of annual appointments
❑ Minutes of meetings of Board of Directors or Executive Committee.
❑ Audit programme
❑ Evidence of work performer by the assistants and reviewed by seniors.
❑ Communication with client regarding audit matter.
❑ Letters of Representation
❑ Confirmation from clients and third parties.
❑ Conclusion reached about significant aspects of audit.
18 Audit Notebook
🠶 Concept
The audit notebook is maintained by the audit assistants. It is a written and
systematic record of the queries made by them and the replies thereto.
🠶 Contents
Some of the contents of audit notebook are mentioned below:
1. Technical details about business
2. Queries for which explanation and information have to be demanded
3. Frauds and errors found in the books during the course of audit
4. Summary of important points of the Articles
5. Notes regarding system of maintaining accounts
6. Names of officials who certify bad debts, depreciation etc
7. Total of important ledger accounts
8. Points to be included in audit report
9. Important matters for future reference
 🠶 Advantages
19 1. Important matters relating to audit work may be easily remembered
2. Ensures continuity of audit work
3. Serves as a proof against charge of negligence
4. Serves as a guide in framing future audit programme

🠶 Disadvantages
The Audit notebook if prepared negligently and carelessly by the audit
assistants, can be used as an evidence of negligence by the auditor in
carrying out the audit. Therefore the auditor should supervise the work
carried on by the assistants.
20 SA 300-Planning an Audit of Financial
Statements
🠶 Scope
SA 300 deals with the auditor’s responsibility to plan an audit of financial
statements. This SA is framed in the context of recurring audits.
🠶 Objective
The objective of the auditor is to plan the audit so that it will be performed
in an effective manner.
21 Requirements
🠶 Involvement of Key Engagement Team Members
The engagement partner and other key members of the engagement team
shall be involved in planning the audit, including planning and participating
in the discussion among engagement team members.
🠶 Preliminary Engagement Activities
The auditor shall undertake the following activities at the beginning of the
current audit engagement:
(a) Performing procedures required by SA 220, “Quality Control for an Audit
of Financial Statements” regarding the continuance of the client
relationship and the specific audit engagement;
(b) Evaluating compliance with ethical requirements, including
independence, as required by SA 220; and
(c) Establishing an understanding of the terms of the engagement, as
required by SA 210.
 🠶 Planning Activities

22
The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit, and that
guides the development of the audit plan.
In establishing the overall audit strategy, the auditor shall:
(a) Identify the characteristics of the engagement that define its scope;
(b) Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the
communications required;
(c) Consider the factors that, in the auditor’s professional judgment, are significant in directing the engagement
team’s efforts;
(d) Consider the results of preliminary engagement activities and, where applicable, whether knowledge gained
on other engagements performed by the engagement partner for the entity is relevant; and
(e) Ascertain the nature, timing and extent of resources necessary to perform the engagement.
The auditor shall develop an audit plan that shall include a description of:
(a) The nature, timing and extent of planned risk assessment procedures, as determined under SA 315
“Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its
Environment”.
(b) The nature, timing and extent of planned further audit procedures at the assertion level, as determined under
SA 330 “The Auditor’s Responses to Assessed Risks”.
(c) Other planned audit procedures that are required to be carried out so that the engagement complies with SAs.
The auditor shall update and change the overall audit strategy and the audit plan as necessary during the course
of the audit.
The auditor shall plan the nature, timing and extent of direction and supervision of engagement team members
and the review of their work.
23 🠶 Documentation
The auditor shall document:
(a) The overall audit strategy;
(b) The audit plan; and
Any significant changes made during the audit engagement to the overall
audit strategy or the audit plan, and the reasons for such changes.
🠶 Additional Considerations in Initial Audit Engagements
The auditor shall undertake the following activities prior to starting an
initial audit:
(a) Performing procedures required by SA 220 regarding the acceptance of
the client relationship and the specific audit engagement; and
(b) Communicating with the predecessor auditor, where there has been a
change of auditors, in compliance with relevant ethical requirements.
24 SA 500-Audit Evidence
🠶 Concept
Audit evidence refers to any information obtained by the auditor so that he can draw
conclusions and express opinion on financial statements.
🠶 What is meant by Sufficient & Appropriate evidence?
The auditor should obtain sufficient and appropriate audit evidences. Sufficiency
refers to the quantum of audit evidence. Appropriateness refers to the quality of
audit evidence.
🠶 What are the factors which determine sufficiency & appropriateness?
1. Degree of risk of misstatement.
2. The result of audit procedures i.e. any fraud or error detected by the auditor.
3. Materiality of the item.
4. Trend shown by accounting ratios.
5. Type of information available including size and characteristics of population.
6. Experience gained during previous audit.
25 🠶 Types of Audit Evidence
1. According to nature
a. Visual, for example, observing stock taking conducted by client’s staff.
b. Documentary, for example, Having a copy of loan agreement.
c. Oral, for example, discussion with management regarding current trends
in business.
2. According to source
d. Internal—this is created within the client’s organization. For example,
copies of bills given to customers.
e. External– this originates outsides the client’s organization. For example,
purchase invoice.
 🠶 Procedures to obtain evidence
26
1. Compliance procedure
Compliance procedures are performed to check the designing, operating
effectiveness and continuity of the internal control system. The following
assertions are considered:
Existence- that the internal control exists
Operating effectiveness- that the internal control system is operating
effectively
Continuity- that the internal control has been so operated throughout the
period
 2. Substantive procedure
27 Substantive procedures are performed to check the completeness, accuracy and
validity of transactions and balances. The following assertions are considered:
Measurement- that a transaction is recorded in the proper period at proper amount
Presentation and disclosure- an item is disclosed, classified and described as per
recognized accounting policies and relevant statutory requirements if any.
Completeness- that there is no unrecorded asset or liability or transaction
Occurrence- that a transaction or event took place which pertains to the entity
during the relevant period
Valuation- that an asset or liability is recorded at an appropriate carrying value
Existence- that an asset or liability exists at a given date
Rights and obligations- that an asset is a right of the entity and liability is an
obligation of the entity at a given date
 🠶 Methods to obtain evidence

28 Compliance & substantive procedures are performed by the following methods:

1. Inspection
It consists of examining records, documents or tangible assets.
2. Observation
It consists of witnessing a process or procedure being performed by others.
3. Inquiry and Confirmation
Inquiry consists of seeking appropriate information from knowledgeable persons inside or
outside the entity. Confirmation consists of the response to an enquiry.
4. Computation
It consists of checking the arithmetical accuracy of records or performing independent
calculations.
5. Analytical Review
It refers to studying significant ratios and trends and investigating unusual fluctuations.
6. Re-performance
It means performing some work which has already been done by the management.
29 SA 520-Analytical Procedures
🠶 Meaning
“Analytical procedures” mean evaluations of financial information through
analysis of plausible relationships among both financial and non-financial data.
Analytical procedures also encompass such investigation as is necessary for
identified fluctuations or relationships that are inconsistent with other relevant
information or that differ from expected values by a significant amount. The
auditor’s choice of procedures, methods and level of application is a matter of
professional judgement.
🠶 Objectives
a. To obtain relevant and reliable audit evidence when using substantive
analytical procedures and
b. To design and perform analytical procedures near the end of the audit that
assist the auditor when forming an overall conclusion as to whether the
financial statements are consistent with the auditor’s understanding of the
entity.
30 Timing of Analytical Procedures

Timing of
Analytical
procedure

Testing or Completion
Planning
performing or conclusion
stage
the audit stage
 🠶 Planning stage
31
At this stage, the auditor obtains understanding about the client's business and
identifies the risk of material misstatements. Here, analytical procedures assist
him in his risk assessment procedures and thus help him in determining the
nature, timing and extent of other procedures.
🠶 The performing stage
While performing the audit the auditor applies substantive analytical
procedures,
a. The auditor’s substantive procedures at the assertion level may be tests of
details, substantive analytical procedures or a combination of both.
b. The decision about which audit procedures to perform, including whether to
use substantive analytical procedures, is based on the auditor’s judgement
about the expected effectiveness and efficiency of the available audit
procedures to reduce audit risk at the assertion level to an acceptably low
level.
 c. The auditor may inquire of management as to the availability and
32
reliability of information needed to apply substantive analytical procedures,
and the results of any such analytical procedures performed by the entity.
d. It may be effective to use analytical data prepared by management,
provided the auditor is satisfied that such data is properly prepared.

🠶 The Conclusion stage

Near the completion of the audit too, he applies analytical procedures,
when forming an overall conclusion as to whether financial statements are
consistent with his understanding of audit.
 Factors to be considered for Substantive Analytical
33 Procedures(SAP)

1. Predictability SAP is to be applied for items which are predictable i.e. where relationship
exists and it is expected to continue as well.

2. Type of account SAP is more suitable for items of P&L A/c due to the trend that can be devised
for them.

3. Routine transaction Vs. SAPs are more useful for routine transactions which occur in large numbers
Non-routine transaction like sales, purchases etc.
Non-routine transactions are difficult to predict.
4. Availability of data Before the application of SAPs, availability of reliable and relevant data is
considered.

5. Assertion SAPs are useful for testing certain assertions like measurement and valuation.
It may not be used for establishing rights and obligations.

6. Disaggregation In case available data can be disaggregated, it is easier to make comparison

and detect unusual fluctuations.

7. Inherent risk and If IR is high then using SAP may not be a useful means to address such risk.
control risk Extensive testing is more appropriate to address high risk of material
misstatement.
 How to use Analytical Procedures as Substantive
34 Tests?
🠶 When designing and performing substantive analytical procedures,
either alone or in combination with tests of details, as substantive
procedures in accordance with SA 330, the auditor shall-
a. Determine the suitability of particular substantive analytical
procedures for given assertions taking account of the assessed risks of
material misstatement and tests of details if any, for these assertions.
b. Evaluate the reliability of data from which the auditor’s expectation of
recorded amounts or ratios is developed.
c. Develop an expectation of recorded amounts or ratios and evaluate
whether the expectation is sufficiently precise to identify a
misstatement that, individually or when aggregated with other
misstatements, may cause the financial statements to be materially
misstated.
d. Determine the amount of any difference of recorded amounts from
expected values that is acceptable without further investigation.
35 SA 530(Revised)-Audit Sampling
🠶 Scope
❑ This SA applies when the auditor has decided to use audit sampling in
performing audit procedures.
❑ It deals with the auditor’s use of statistical and non-statistical sampling
when:
❑ designing and selecting the audit sample,
❑ performing (i) tests of controls and (ii) tests of details, and
❑ evaluating the results from the sample.
36 Objective
🠶 The objective of the auditor when using audit sampling is to provide a
reasonable basis for the auditor to draw conclusions about the
population from which the sample is selected.
37 Definitions
🠶 Audit sampling (sampling)
🠶 Population
🠶 Sampling unit
🠶 Statistical sampling
🠶 Sampling risk
🠶 Non-sampling risk
🠶 Stratification
🠶 Tolerable misstatement
🠶 Tolerable rate of deviation
🠶 Anomaly
 Audit sampling (sampling)
38
The application of audit procedures to less than 100% of items within a
population of audit relevance such that all sampling units have a chance of
selection in order to provide the auditor with a reasonable basis on which
to draw conclusions about the entire population.
39 Population

The entire set of data from which a sample is selected and

about which the auditor wishes to draw conclusions.
40 Sampling unit
The individual items constituting a population.
41 Statistical sampling
An approach to sampling that has the following
characteristics:
(i) Random selection of the sample items; and
(ii) The use of probability theory to evaluate sample results,
including measurement of sampling risk.

A sampling approach that does not have characteristics (i) and (ii) is
considered non-statistical sampling.
42 Sampling risk
The risk that the auditor’s conclusion based on a sample may be different
from the conclusion if the entire population were subjected to the same
audit procedure. Sampling risk can lead to two types of erroneous
conclusions:
(i) In the case of a test of controls, that controls are more effective than
they actually are, or in the case of a test of details, that a material
misstatement does not exist when in fact it does. The auditor is primarily
concerned with this type of erroneous conclusion because it affects audit
effectiveness and is more likely to lead to an inappropriate audit opinion.
(ii) In the case of a test of controls, that controls are less effective than they
actually are, or in the case of a test of details, that a material misstatement
exists when in fact it does not. This type of erroneous conclusion affects
audit efficiency as it would usually lead to additional work to establish that
initial conclusions were incorrect.
43 Sampling Risk - Summary

Risk that:
Conclusion based on Sample ≠ Conclusion if based on
Population

Type II Error Type I Error

Test Conclusion Error Test Conclusion Error

of based on of of based on of
Sample Popn. Sample Popn.

Controls More Less Over Controls Less More Under

Effectiv Effectiv Reliance Effectiv Effectiv Reliance
e e e e
Details MS Incorrect Details MS Incorrect
MS MS
Do not Acceptance Do not Rejection
Exists Exist
Exist
Effect: Adversely affects audit Effect: AdverselyExist
affects audit
effectiveness, leads to inappropriate efficiency, leads additional work to
opinion. disprove initial conclusions.
44 Non-sampling risk
The risk that the auditor reaches an erroneous conclusion for any reason
not related to sampling risk.

Examples of non-sampling risk include::

use of inappropriate audit procedures, or
misinterpretation of audit evidence, and
failure to recognize a misstatement or deviation.
45 Stratification
The process of dividing a population into sub-populations, each of which is
a group of sampling units which have similar characteristics (often
monetary value).
46 Tolerable misstatement
A monetary amount set by the auditor in respect of which the auditor seeks to
obtain an appropriate level of assurance that the monetary amount set by the
auditor is not exceeded by the actual misstatement in the population
47 Tolerable rate of deviation
A rate of deviation from prescribed internal control procedures set by the
auditor in respect of which the auditor seeks to obtain an appropriate level
of assurance that the rate of deviation set by the auditor is not exceeded
by the actual rate of deviation in the population.
48 Anomaly
A misstatement or deviation that is demonstrably not representative of
misstatements or deviations in a population.
49 Requirements
🠶 Sample Design, Size and Selection of Items for Testing
🠶 Performing Audit Procedures
🠶 Nature and Cause of Deviations and Misstatements
🠶 Projecting Misstatements
🠶 Evaluating Results of Audit Sampling
50 Sample Design, Size and Selection of Items
for Testing
🠶 Sample Design:
When designing an audit sample, the auditor shall consider (i)
the purpose of the audit procedure and (ii) the characteristics of
the population from which the sample will be drawn.
🠶 Sample Size:
The auditor shall determine a sample size sufficient to reduce
sampling risk to an acceptably low level.
🠶 Selection of Items for Testing:
The auditor shall select items for the sample in such a way that
each sampling unit in the population has a chance of
selection.
51 Performing Audit Procedures
🠶 The auditor shall perform audit procedures, appropriate to the purpose,
on each item selected.

🠶 If the audit procedure is not applicable to the selected item, the auditor
shall perform the procedure on a replacement item.

🠶 If the auditor is unable to apply the designed audit procedures, or

suitable alternative procedures, to a selected item, the auditor shall
treat that item as a deviation from the prescribed control, in the case of
tests of controls, or a misstatement, in the case of tests of details.
52 Nature and Cause of Deviations and
Misstatements
🠶 The auditor shall investigate the nature and cause of any deviations or
misstatements identified, and evaluate their possible effect on the
purpose of the audit procedure and on other areas of the audit.

🠶 In the extremely rare circumstances when the auditor considers a

misstatement or deviation discovered in a sample to be an anomaly,
the auditor shall obtain a high degree of certainty that such
misstatement or deviation is not representative of the population. The
auditor shall obtain this degree of certainty by performing additional
audit procedures to obtain sufficient appropriate audit evidence that the
misstatement or deviation does not affect the remainder of the
population.
53 Projecting Misstatements
🠶 For tests of details, the auditor shall project misstatements found in the
sample to the population.
54 Evaluating Results of Audit Sampling
The auditor shall evaluate:
(a) The results of the sample; and
(b) Whether the use of audit sampling has provided a
reasonable basis for conclusions about the population that has been tested.
55 SA 550-Related Parties
🠶 Scope
This Standard on Auditing (SA) deals with the auditor’s responsibilities
regarding related party relationships and transactions when performing an
audit of financial statements. Specifically, it expands on how SA 315, SA
330 and SA 240 are to be applied in relation to risks of material
misstatement associated with related party relationships and transactions.
SA 315, “Identifying and Assessing the Risks of Material Misstatement
Through Understanding the Entity and Its Environment”.
SA 330, “The Auditor’s Responses to Assessed Risks”.
SA 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of
Financial Statements”.
56 Objectives
The objectives of the auditor are:
(a) Irrespective of whether the applicable financial reporting framework establishes
related party requirements, to obtain an understanding of related party relationships
and transactions sufficient to be able:
(i) To recognise fraud risk factors, if any, arising from related party relationships and
transactions that are relevant to the identification and assessment of the risks of
material misstatement due to fraud; and
(ii) To conclude whether the financial statements, in so far as they are affected by
those relationships and transactions:
a. Achieve a true and fair presentation (for fair presentation frameworks); or
b. Are not misleading (for compliance frameworks); and
(b) In addition, where the applicable financial reporting framework establishes related
party requirements, to obtain sufficient appropriate audit evidence about whether
related party relationships and transactions have been appropriately identified,
accounted for and disclosed in the financial statements in accordance with the
framework.
57 Definitions
🠶 Arm’s length transaction–
A transaction conducted on such terms and conditions as between a willing
buyer and a willing seller who are unrelated and are acting independently
of each other and pursuing their own best interests.
58
🠶 Related party– A party that is either:
(i) A related party as defined in the applicable financial reporting framework; or
(ii) Where the applicable financial reporting framework establishes minimal or no
related party requirements:
a. A person or other entity that has control or significant influence, directly or indirectly
through one or more intermediaries, over the reporting entity;
b. Another entity over which the reporting entity has control or significant influence,
directly or indirectly through one or more intermediaries; or
c. Another entity that is under common control with the reporting entity through
having:
i. Common controlling ownership;
ii. Owners who are close family members; or
iii. Common key management.
🠶 However, entities that are under common control by a state (i.e., a national,
regional or local government) are not considered related unless they engage in
significant transactions or share resources to a significant extent with one another.
59 Nature of Related Party Relationships and Transactions

Many related party transactions are in the normal course of business. In such
circumstances, they may carry no higher risk of material misstatement of the
financial statements than similar transactions with unrelated parties. However,
the nature of related party relationships and transactions may, in some
circumstances, give rise to higher risks of material misstatement of the financial
statements than transactions with unrelated parties. For example:
🠶 Related parties may operate through an extensive and complex range of
relationships and structures, with a corresponding increase in the complexity
of related party transactions.
🠶 Information systems may be ineffective at identifying or summarising
transactions and outstanding balances between an entity and its related
parties.
🠶 Related party transactions may not be conducted under normal market terms
and conditions; for example, some related party transactions may be
conducted with no exchange of consideration.
60 Responsibilities of the Auditor

🠶 Since related parties are not independent of each other, many financial reporting
frameworks establish specific accounting and disclosure requirements for related
party relationships, transactions and balances to enable users of the financial
statements to understand their nature and actual or potential effects on the
financial statements. Where the applicable financial reporting framework
establishes such requirements, the auditor has a responsibility to perform audit
procedures to identify, assess and respond to the risks of material misstatement
arising from the entity’s failure to appropriately account for or disclose related
party relationships, transactions or balances in accordance with the requirements
of the framework.
🠶 Even if the applicable financial reporting framework establishes minimal or no
related party requirements, the auditor nevertheless needs to obtain an
understanding of the entity’s related party relationships and transactions
sufficient to be able to conclude whether the financial statements, insofar as they
are affected by those relationships and transactions:
(a) Achieve a true and fair presentation (for fair presentation frameworks); or
(b) Are not misleading (for compliance frameworks)
 Responsibilities of the Auditor
61
🠶 In addition, an understanding of the entity’s related party relationships
and transactions is relevant to the auditor’s evaluation of whether one or
more fraud risk factors are present as required by SA 240 because fraud
may be more easily committed through related parties.
🠶 Owing to the inherent limitations of an audit, there is an unavoidable risk
that some material misstatements of the financial statements may not
be detected, even though the audit is properly planned and performed in
accordance with the SA 200. In the context of related parties, the
potential effects of inherent limitations on the auditor’s ability to detect
material misstatements are greater for such reasons as the following:
a. Management may be unaware of the existence of all related party
relationships and transactions, particularly if the applicable financial
reporting framework does not establish related party requirements.
b. Related party relationships may present a greater opportunity for
collusion, concealment or manipulation by management.
62 SA 580-Written Representation
🠶 Scope
It deals with the auditor’s responsibility to obtain written representations from
management and, where appropriate, those charged with governance.
🠶 Objectives
(a) To obtain written representations from management and, where appropriate,
those charged with governance that they believe that they have fulfilled their
responsibility for the preparation of the financial statements and for the
completeness of the information provided to the auditor;
(b) To support other audit evidence relevant to the financial statements or specific
assertions in the financial statements by means of written representations, if
determined necessary by the auditor or required by other SAs; and
(c) To respond appropriately to written representations provided by management
and, where appropriate, those charged with governance, or if management or,
where appropriate, those charged with governance do not provide the written
representations requested by the auditor.
63 Definition
🠶 Written representations – A written statement by management
provided to the auditor to confirm certain matters or to support other
audit evidence. Written representations in this context do not include
financial statements, the assertions therein, or supporting books and
records.

🠶 For purposes of this SA, references to “management” should be read as

“management and, where appropriate, those charged with
governance.” Furthermore, in the case of a fair presentation
framework, management is responsible for the preparation and fair
presentation of the financial statements in accordance with the
applicable financial reporting framework; or the preparation of financial
statements that give a true and fair view in accordance with the
applicable financial reporting framework.
 Written Representations as Audit Evidence
64

🠶 Audit evidence is all the information used by the auditor in arriving at

the conclusions on which the audit opinion is based. Written
representations are necessary information that the auditor requires in
connection with the audit of the entity’s financial statements.
Accordingly, similar to responses to inquiries, written representations
are audit evidence.
🠶 Although written representations provide necessary audit evidence, they
do not provide sufficient appropriate audit evidence on their own about
any of the matters with which they deal. Furthermore, the fact that
management has provided reliable written representations does not
affect the nature or extent of other audit evidence that the auditor
obtains about the fulfilment of management’s responsibilities, or about
specific assertions.
 Requirements
65

🠶 Management from Whom Written Representations Requested

The auditor shall request written representations from management with
appropriate responsibilities for the financial statements and knowledge of
the matters concerned.
🠶 Written Representations about Management’s Responsibilities
Preparation of the Financial Statements
The auditor shall request management to provide a written representation
that it has fulfilled its responsibility for the preparation of the financial
statements in accordance with the applicable financial reporting
framework, including where relevant their fair presentation, as set out in
the terms of the audit engagement.
66 Information Provided and Completeness of Transactions
The auditor shall request management to provide a written representation
that:
(a) It has provided the auditor with all relevant information and access as
agreed in the terms of the audit engagement, and
(b) All transactions have been recorded and are reflected in the financial
statements.
Description of Management’s Responsibilities in the Written
Representations
Management’s responsibilities shall be described in the written
representations in the manner in which these responsibilities are described
in the terms of the audit engagement.
 Date of and Period(s) Covered by Written Representations
67
The date of the written representations shall be as near as practicable to,
but not after, the date of the auditor’s report on the financial statements.
The written representations shall be for all financial statements and
period(s) referred to in the auditor’s report.
68 Doubt as to the Reliability of Written Representations

🠶 If the auditor has concerns about the competence, integrity, ethical values or
diligence of management, or about its commitment to or enforcement of these,
the auditor shall determine the effect that such concerns may have on the
reliability of representations (oral or written) and audit evidence in general.
🠶 In particular, if written representations are inconsistent with other audit evidence,
the auditor shall perform audit procedures to attempt to resolve the matter. If the
matter remains unresolved, the auditor shall reconsider the assessment of the
competence, integrity, ethical values or diligence of management, or of its
commitment to or enforcement of these, and shall determine the effect that this
may have on the reliability of representations (oral or written) and audit evidence
in general.
🠶 If the auditor concludes that the written representations are not reliable, the
auditor shall take appropriate actions, including determining the possible effect on
the opinion in the auditor’s report in accordance with SA 705 “Modifications to the
Opinion in the Independent Auditor’s Report” , having regard to the requirement of
this SA.
69 Requested Written Representations Not Provided

🠶 If management does not provide one or more of the requested written

representations, the auditor shall:
(a) Discuss the matter with management;
(b) Re-evaluate the integrity of management and evaluate the effect that
this may have on the reliability of representations (oral or written) and
audit evidence in general; and
(c) Take appropriate actions, including determining the possible effect on
the opinion in the auditor’s report in accordance with SA 705, having
regard to the requirement of this SA.
70 Written Representations about Management’s Responsibilities

🠶 The auditor shall disclaim an opinion on the financial statements in

accordance with SA 705 if:
(a) The auditor concludes that there is sufficient doubt about the integrity
of management such that the written representations are not reliable; or
(b) Management does not provide the written representations required.